TABLE
OF CONTENTS
Title
Page i
Certification
ii
Dedication
iii
Acknowledgements
iv
Abstract
v
Table
of Contents vi
Chapter One:
Introduction
1.1
Background to the Study 1
1.2
Statement of Problems 4
1.3
Research Questions 6
1.4
Objectives of the Study 6
1.5
Statement of Hypothesis(es) 7
1.6
Significance of the Study 8
1.7
Scope of the Study 10
1.8
Limitations of the Study 11
1.9
Definition of Terms 11
Chapter
Two: Review of Related
Literature
2.1 Introduction
13
2.2
Concept
of Auditing 14
2.3 Enduring principles of auditing 20
2.4 Postulate
of Auditing 21
2.5 Demand
and supply of audit services 22
2.5.1 Ways to reduce information risk 26
2.5.2 Theories on the Demand and Supply of Audit
Service 26
2.6
Types
of Audit 28
2.7 Advantages
of Audit to Various Groups 30
2.8
Internal
Audit as a Tool of Ensuring Accountability
in an Organization 34
2.7.1
Limitation of Auditing 37
2.8.1 Functions of the Internal Audit 38
2.8.2 The Differences
Between Internal and External Auditing 39
2.9
Auditors’ Tenure and Perceived Credibility of
Financial
Reporting 41
Chapter
Three: Research Method and Design
3.1
Introduction 44
3.2
Research Design 44
3.3
Description of Population of the Study 44
3.4
Sample Size 45
3.5
Sampling Techniques 45
3.6
Sources of Data Collection 46
3.7
Method of Data Presentation 46
3.8
Method of Data Analysis 46
Chapter
Four: Data Presentation, Analysis and Interpretation
4.1 Introduction 48
4.2 Data Presentation 48
4.3 Data Analysis 48
4.4 Hypothesis Testing 58
Chapter
Five: Summary of Findings, Conclusion and Recommendations
5.1
Introduction 63
5.2 Summary of Findings 63
5.3
Conclusion 64
5.4
Recommendations 64
References
66
Appendix
I 68
Appendix
II 69
CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
In
the past few years, auditors had been blamed due to their role in the mega
corporate scandals such as Enron, WorldCom, Global crossing, Imclone system and
Tyco international and in Nigeria
such as Cadbury (Nig) Plc, African Petroleum (Nig) Plc. The criticism had
raised lot of questions regarding auditors’ independence, such criticism
leveled against auditors because they have be auditing their clients for a long
time and subsequently concentrated more on non-audit services rather than
audit.
The
familiarity that exists between the auditors and their clients as a result of
long audit tenure encourages failure in auditor independence. Though, there has
been a call for sweeping changes in the auditing profession to ensure
independence and therefore improved their audit quality (“Auditing profession,”
2002).
The
term audit is derived from the Latin word ‘audire’ which means to hear. In
early days an auditor used to listen to the accounts read over by an accountant
in order to check them. It was in use in all ancient countries such as
Mesopotamia, Greece, Egypt, Rome, U.K and auditing.
Auditing
evolved and grew rapidly after the industrial revolution in the 18th
century with the growth of the joint stock companies the ownership management became
separate. The shareholders who were the owners needed a report form an
independent expert on the accounts of the company managed by the board of
director’s who were the employees. The purpose for this is to ascertain whether
the account was true and fair rather than detection of errors and frauds.
(Petersen, 2005).
With
increase in the size of companies and the volume of transaction the main
objective of audit shifted to ascertaining whether the accounts were true and
fair rather than true and correct. Hence, the emphasis was not on arithmetic
accuracy but on a fair presentation of financial reporting. Accounting and
auditing play significant role in principal-agent relationship (i.e. agency
relationship). The agency relationship between owners and manager in a firm
creates a natural conflict of interest because of the information asymmetry
that exists between managers and the owners. This information asymmetry means
that manager generally has more information about “true” financial position
(shown by a balance sheet), and results of operations (in a profit and loss
account) of the enterprise than the absentee owner does. This contract
relationship between the shareholders and managers in a firm lead to the demand
for firm auditing.
Auditing
has a significant effect to firms, it helps to determine whether the overall
financial statement present fairly in accordance with the established criteria,
the extent to which rules, policies, laws audit and tracing funds or assets
identification and recovery, investigating the existence, nature., extent and
identification of employee who misappropriate asset.
Long
term audit tenure has created some expectation gap this gap has led to failure
of the auditor, to carryout is duty effectively. This is due, to the fact that
the expectation of the auditors are not met because of the familiarity that
exist between the auditors and their clients, this familiarity has made the
auditors to fail in their area of independence, credibility and confidentiality
because during long term audit tenure, auditors focus on non-audit service than
audit services, and this led to many corporate scandal.
1.2
Statement of Problem
Several
studies have attempted to evaluate possible explanatory variables for the state
of audit quality. In the light of these studies, auditor tenure has become the
focus of much debate. Should a firm replace its auditor’s on a regular basis,
or should the auditor be allowed to build long-term relationship with the
client? Studies on the effect of audit tenure on the quality of financial
reporting are at polarity. A considerable number of these studies considered
the rotation of audit firm as a way improving the quality of financial
reporting. This is because familiarity with the client has the effect of
reducing the fresh point of view auditors have in the point of view auditors
have in the early years of engagement. The Sarbanes-Oxley Act of 2002
consolidates this view as it requires rotation of the lead audit partner every
five years so that the engagement can be viewed “with fresh and skeptical eyes”.
The argument basically is that longer audit tenure trends to result in an
opportunity cost of auditor independence, conversely, other studies also argue
that longer auditor tenure improve auditor quality as auditor may need time to
expertise in the business they audit and acquires client-specific knowledge
overtime. This implies that audit quality is lower during the early year of the
Auditor-client relationship, and the audit quality increases with length of the
auditor-tenure due to the reduction in information asymmetry between auditor
and client.
1.3
Research Questions
The
research questions formulated from this research work are:
i.
Is there any significant relationship
between the duration of the auditor and the quality of financial reporting?
ii.
Does audit tenure improve the quality of
financial reporting in achieving organizational objective?
iii.
Does audit objective help in maintaining
accountability?
iv.
Does audit tenure help to reduces fraud
in the organization?
1.4 Objectives of the Study
The
main of objective of the study is to examine the effect of audit tenure on the
quality of financial reporting; others include;
i.
To examine the relationship between
audit tenure and the quality of financial reporting.
ii.
To examine if audit tenure help to
improve the credibility of financial reporting.
iii.
To determine whether audit tenure has
significant influence in the role of financial reporting in an organization.
iv.
To examine the role of audit tenure in
fraud central and detection.
1.5 Statement of Hypotheses
In
order to achieve the stated objectives of this study, the following hypothesis
were formulated in null and alternative basis.
Hypothesis
1
HO:
There is no significant relationship
between the duration of auditor and the quality of financial reporting.
HI:
There is a significant relationship between
the duration of auditor and the quality of financial reporting.
Hypothesis
2
HO: There is no significant
difference between audit objective and ability to maintain accountability by
firms.
HI:
There is significant difference between
audit objective and ability to maintain accountability by firms.
Hypothesis 3
HO: There is no significant
relationship between audit rotation and fraud detection.
HI: There is significant relationship between
audit rotation and fraud detection.
1.6 Significance of the Study
This
study is relevance in all human endeavors as listed below;
i.
Academic relevance
ii.
National relevance
iii.
Accounting relevance
Academic
relevance: This research work will instill in the
students to have a general insight into the effect of audit tenure on the
quality of financial reporting, which will enable us to make useful suggestions
and contributions on topic under survey.
National
relevance: This research work is relevance to the
nation in the following ways;
a.
It will serve as a referenced point to
management awards achieving their organizational goal and objective.
b.
It will enable the investors to carry
out a check and balance between the auditors and the companies to determine the
extent to which audit tenure has influence the quality of financial reporting
for the purpose of investment decision.
c.
Since the government is also
interested in the financial statement of every company, for the purpose of
taxation, it will be relevance to the government to see how audit tenure has
influence the quality of financial reporting.
d.
It will enable the public and
researchers to make useful suggestions and contributions on the topic under
review.
Accounting
profession: This research work is relevance to the
accounting profession in the following ways.
a.
To encourage the profession to lend
increased credibility to financial statement.
b.
To encourage auditor standard to
provide detailed guidance on risk factors that auditor should considered in
assessing whether financial statements may contain material misstatements caused
by fraud and irregularities.
c.
To instill into the profession, the
sense of responsibility, the essence of professionalism, independence and
confidentiality.
1.7
Scope of the study
This research work is to observe the impact of audit
tenure on quality financial reporting of auditors on quality of audit in
southern Nigeria. The researcher focus is on the qualified accountants both in
the public sector and private sector, those in the public sector shall comprise
of qualified lectures in the accounting, banking, management and economics
departments while the private sectors shall comprise of selected accredited
auditing firms in Abia State, Edo State and Lagos State respectively. A total
of five hundred (500) consultants, lecturers accountants and auditors are
examined upon which questionnaires are administered.
1.8
Limitations of the study
There
are many constraints which often hinder the successful completion of a research work; it is designed
to provide reasonable assurance not absolute assurance. In view of these, there
is lack of adequate data on specific areas of investigation this cause some
limitation to researcher. Unwillingness of staff to release some vital
information due to overriding, duty of secrecy militated against the
information; this is because staff regards that as confidential.
1.9 Definition of Terms
Auditing:
Auditing
is a systematic process of objectively obtaining and evaluating evidence regarding
as sections about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and
communicating the result to interest users.
Directors:
These
are a group of senior managers who run a company.
Internal
Control: Internal control is the examination, monitoring and
analysis of activities related to a company’s operation, including its business
structure employee behaviour and information systems.
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